PREDICTING THE PULSE OF THE ECONOMY

By PENNY SINGER

Published: January 10, 1988

WHAT everyone in business needs is a good crystal ball. But to be of value, forecasts must be accurate, and a Chappaqua consulting group, Levy Economic Forecasts, has compiled one of the best records in the country for predicting turning points of the business cycle in the United States for the last 40 years.

Forecasting the economic future is the business of S. Jay Levy, who started Levy Economic Forecasts with his late father, Jerome Levy, in Manhattan in 1949. In 1956 the company moved to Chappaqua to distance itself from the turmoil of Wall Street - in order to gain perspective on its work, Jay Levy said, Now with his son, David, as his partner, Mr. Levy publishes Industry Forecast, the oldest, paid-circulation publication of its kind in the country. Published monthly since 1949, the Levys's newsletter has attained a reputation for accuracy by predicting recession periods over a 25-year span.

''Uncertainty about the economy complicates executive decisions and leads to expensive mistakes; it reduces difficult choices to the toss of a coin,'' explained the senior Mr. Levy. ''Our company is based on our belief that every executive and money manager can benefit from a reliable forecast. The ways business can profit by anticipating changes in the economic climate are limitless and sometimes astonishing.''

In their analysis of the general economy, its major sectors and key industries, the Levys use an unusual method of forecasting that focuses on profits.

''My father first came up with the equation we still use,'' Mr. Levy explained. ''He originally came upon it as the byproduct of a project he was working on to eliminate unemployment. It's a simple equation based on common sense. We all know that large profits persuade businesses to expand and that skimpy profits lead business to retrench. Yet almost all other economists overlook profits in forecasting, while we believe that by focusing on total business profits you get the most accurate forecast possible, since profits are what motivate most of the production in a private-enterprise economy.''

One can accurately predict total profits of a business, Mr. Levy said, by analyzing ''the sources of profits.'' ''If you can predict profits, you can predict the direction of the economy,'' he said.

Just how well has the Levy formula worked? Whenever Levy Economic Forecasts tells its clients the economy will be strong, they have good reason to listen; the newsletter has never predicted the economy would be robust when a recession later occurred.

Subscribers, who pay $250 a year for the newsletter, also receive a quarterly supplement, ''Profits and Stock Prices,'' which tracks the relationship between total corporate earnings and the performance of the stock market. Although the Levys were reluctant to reveal the number of subscribers on their list, they volunteered that about half of them were money managers and the others were business executives in 80 countries.

What did subscribers learn last year? In April they were warned that the stock market was dangerously high and to be wary of the market. In June and July they were advised that retailers were ordering cautiously for autumn and the Christmas season as the result of disappointing sales in April and May.

''This is an example of how we can help subscribers manage their businesses better,'' Mr. Levy said. ''Retailers who got the warning started to watch inventories closely and judging from the flat retail Christmas sales figures that were recently posted, we were right on target.''

In the most recent issue of the newsletter, December 1987-January 1988, readers were told that consumer buying was limited by near-zero growth of their real income even though their eagerness to spend and willingness to borrow had not noticeably abated.

As for the general economic outlook for 1988, the Levys write that ''the new year will be characterized by weak personal consumption, declining residential construction, a fair improvement in business outlays for plant and equipment, and a sizable reduction in the balance of trade deficit.''

''These conflicting critical forces will result in a slow, unsatisfactory rate of economic growth,'' they continue. ''The economy will grow at a sluggish rate of 2 percent this year. And there will also be an increase in unemployment and some growth in the number of women entering the labor force. And if the credit cycle comes to an end, the economy will be in danger of recession.''

When asked how accurate the Levy forecasts have been, David Levy said: ''We predicted every recessionary period in the years from 1960 to 1985. In the last few years we may not have always been entirely right, but we've never been entirely wrong. For instance, we've never predicted a booming economy that turned out to be a bust.''

In addition to their newsletter, the Levys also act as consultants to companies. ''We help to make practical decisions based on economic forecasts targeted specifically to their industry, and in doing so we've been able to increase their profits in many sometimes unexpected ways,'' David Levy explained.

''For instance, we discouraged an equipment manufacturer from accepting low-margin orders late in a recession, freeing the company to accept more profitable orders a few months later,'' he said. ''During a particularly bad recession several years ago, we convinced a technology company not to hold off building a new plant, which they found they needed to rack up sales and profits during the recovery. And we correctly advised a consumer-products company that continuing inflation and a firm economy would support the price increases they were considering.''

David Levy, who is 32 years old, said he and his father, 65, worked with corporate clients as a team. ''Our assignments take us all over the map,'' David Levy said. ''We go out together or one of us or the other meets with a client. We're interchangeable. Recently I met with the head of a large corporate-economics department helping to assemble long-term forecasts for internal planning, while my dad was consulting with the investment-research department of a bank, explaining the business outlook to their analysts and the economy's impact on the profitability of individual industries.''

The younger Mr. Levy suggested that forecasts of inflation, interest rates, business and consumer spending were essential for marketing and financial planners in all industries when they were projecting sales. ''And the same information gives personnel and labor-relations executives an advanced look at unemployment and salary trends that will affect their hiring practices and wage negotiations,'' he said.

The Levys's retention rate of subscribers and clients remains consistently high - between 70 and 80 percent, David Levy estimated. New subscribers are sought by direct-mail advertising, said Mr. Levy, adding that the company uses the service of an outside direct-mail specialist. ''Ours is a fascinating business,'' he said. ''It's always intrigued me. But my dad never pushed me into it. Neither my brother nor sister are involved. Previously I worked in the market-research department of several advertising agencies before I came aboard.''

At a time when research departments are expanding and statistical models are becoming more complex, the Levys have streamlined their operation. David Levy said: ''We run a tight ship. We operate with only six full-time employees.''

However the Levys keep a close watch on their profit predictions for their own company. Over the last four years, they have seen their profits double, and their forecast for their business is that it will continue strong.